The Government’s Path is Unsustainable

Will we have another government shutdown? … federal spending and debt levels are out of control … Janet Yellen’s preferred health diagnostic has logic holes … how to protect yourself

Remember the government shutdown from December 2018 through January 2019?

It cost the economy $11 billion.

Most of that was recouped when the government went back online, but $3 billion was lost forever.

Well, we’re facing another possible government shutdown today as lawmakers have yet to reach a deal to extend funding past September 30.

As I write Friday morning, the latest news is Speaker Kevin McCarthy sent his House members home for the week without a plan to avoid the looming government shutdown. This happened after some Republicans didn’t go along with McCarthy’s spending plan.

Odds are that there will be some 11th-hour solution. That’s what usually happens.

If not, it will complicate an already challenging situation for the Federal Reserve. After all, accurately navigating inflation’s impact on the economy is tough enough. But for a Fed trying to thread the needle, how do you accurately assess the artificial economic influence of a government shutdown?

(Not to mention the United Auto Workers strike that’s now a week deep… or the Hollywood writers/actors strike that’s estimated to be costing the California economy more than $3 billion and counting.)

Today, let’s look beyond this risk of a shutdown to the larger problem – the government’s reckless spending. We’re getting closer to the point at which “kicking the can down the road” is no longer tenable.

It’s critical to know what that means, and how to protect your wealth from what’s coming.

On June 3rd, our last debt ceiling drama resolved when President Biden signed the laughably named “Fiscal Responsibility Act of 2023”

Here we are a few months later, and with the ink barely dry on that paragon of “fiscal responsibility,” our government just set a new debt record this week…

$33 trillion.

Now, you likely just read this “$33 trillion” figure and felt some pressure to conclude “that’s a lot of money.” But let me help contextualize it since the amount is too enormous for humans to process.

If you took a stack of one-dollar bills and piled them on top of each other, one billion of those dollars (yes, we’re starting with one billion) would reach 67.9 miles into the sky.

And if we stacked one trillion dollar-bills on top of one another?

It would stretch 67,866 miles into space.

Now multiply that by 33 and that’s what our government owes.

Driving this record debt is uncontrollable government spending

The firehose of spending during the pandemic was a gamechanger. Here’s some mind-blowing data from 2021 that reveals just how insane it was.

From TechStartUps.com:

Last year, we wrote a piece titled, “40% of US dollars in existence were printed in the last 12 months,” one of our most popular articles.

Now a little over a year after our last piece, the Federal Reserve has updated the numbers.

Sadly, it’s no longer 40 percent of all U.S. dollars that were printed since 2020, not 50 percent and not even 70 percent.

Since January 2020, the US has printed nearly 80% of all US dollars in existence.

Now, we could debate the necessity of one-time, higher-than-normal pandemic-related government spending (and currency creation). But the pandemic is behind us. So, why is today’s federal spending 33% higher than in Q1 2020, right before the pandemic? Should it not have fallen to approximate pre-pandemic levels?

Below, look at the chart of the federal government’s total expenditures since 2000. The line is as straight as they come (except for the comparatively small bump during the Global Financial Crisis) until the pandemic.

And yet, here we are today, post-pandemic, with government spending roughly 30% higher than what the straight-line projection suggests it should be.

Source: StockCharts.com

Let’s return to our nation’s total public debt (the $33 trillion figure), this time looking at its chart.

Going back to 1975, notice how the debt grew at a relatively even rate until the late-2000s.

Since then, instead of linear growth (in blue), we’ve begun exponential growth (in red).

Source: Federal Reserve data

By the way, this $33 trillion of debt doesn’t reflect our government’s unfunded liabilities.

To make sure we’re all on the same page, unfunded liabilities are all the “stuff” the U.S. government has promised to pay out to its citizens in the future. You have Social Security, Medicaid, pensions, and various social safety-net programs, among other things.

These expenses are very real… they’re enormous… yet they’re not reflected in that $33 trillion debt figure because they’re “future” expenses. Our government is all-too-happy not to include them in our official debt calculations.

So, how much are we on the hook for with these unfunded liabilities?

More than $193 trillion.

Let’s begin pushing this Digest toward “what’s different now” and “why you should care”

When you don’t pay off your credit card balance at the end of the month, what happens?

You owe interest on the unpaid amount, which gets added to your principal amount.

If you went month-after-month without paying off your credit card balance, letting the principal amount climb, even paying just the minimum amount of debt service would snowball and eventually become difficult to manage.

Imagine a snowball rolling down a hill, growing larger as new snows sticks to it.

This is what’s happening with our federal debt. And guess what’s happened to the interest rate on that debt as the Fed has jacked rates higher for more than a year?

“Through the nose” is an appropriate description.

The root issue now is “what percentage of our government’s total spending is going to paying the interest on its debt service?”

According to the U.S. Treasury, as of August, it cost the government $808 billion just to maintain its debt. That’s 15% of the total federal spending – and growing.

But let’s contextualize this further.

Here’s the Peter G. Peterson Foundation (a self-described “nonpartisan organization dedicated to increasing awareness and accelerating action on America’s long-term fiscal challenges”):

The federal government already spends more on interest than on budget areas such as veterans’ benefits, transportation, and education.

In fiscal year 2024, interest payments will surpass the combined amount that the federal government spends on major healthcare programs other than Medicare, which is comprised of Medicaid, the Children’s Health Insurance Program (CHIP), and premium tax credits and related spending.

In fiscal year 2028, the federal government will spend more on interest than on defense.

And as you can see below, 10 years from now, debt service will cost us more than nearly all other government programs except Medicare and Social Security.

Source: Peter G. Peterson Foundation

Our politicians are on an unsustainable spending path, which we’ll tie to your personal net worth momentarily.

Before we get there, earlier this week, Treasury Secretary Janet Yellen downplayed the issue, saying the government has its spending under control

Here’s Yellen:

The statistic or metric that I look at most often to judge our fiscal course is net interest as a share of GDP. And even with the rise we have seen in interest rates that remains at a very reasonable level.

Let’s try to follow Yellen’s logic…

She prefers to compare net interest payments to US GDP.

We’ve just looked at net interest payments, and how they’re climbing.

But are they truly of no concern relative to the GDP?

Well, what goes into a GDP number? Today, almost 25% of it comes from government spending.

And what’s been happening with government spending? Well, it’s ballooned thanks to money printed out of nowhere by the Fed.

Below, look below at the chart of the government’s spending (in blue) along with the M1 money stock (in red). Do you happen to notice the slightest of similarities in their shapes around the pandemic?

Source: StockCharts.com

Let’s now throw GDP into the mix.

Since there are other factors that impact GDP beyond government spending, we wouldn’t expect to see it grow as much following the pandemic as the money supply. But we would expect to see a noticeable increase in GDP since it is now reflecting trillions of new dollars of government spending.

Here you go…

Source: Federal Reserve data

So, Yellen is telling us we have nothing to fear with government spending because the ratio of debt service to GDP is about the same as it has been in prior years. In essence, she’s saying “our nation’s productive output can handle the debt service.”

But our elevated GDP number is not exclusively due to authentic economic productivity. It’s been goosed by artificially boosted money stock, government spending, and stimulus dollars.

It’s basic math that if today’s far-higher net debt service figure is compared with an artificially boosted higher GDP number, it will generate a percentage ratio that’s largely the same as before.

Yellen’s reference to this ratio ignores the absolute dollar value of our nation’s soaring debt service. It provides the veneer of “normal” when things are not normal.

But don’t worry – she’s “not really concerned about the impact” of recent federal spending programs.

So, what’s the takeaway?

While we sit here and fret about whether inflation will drop by 0.1% or 0.2% next month, and whether the Fed will cut rates two times or four times next year, we need to lift our heads to see what’s out on the horizon.

There is no other way for our government to outrun its debt than by currency debasement.

Now, that’s been the reality for years. The difference today is the acceleration in interest payments on debt as a percentage of the government’s total expenditures. As it snowballs this decade, it will crowd out spending available for other programs.

That will leave politicians with a few options…

Default on government debt (which they won’t do because it would destroy our economy, and by extension, the global economy) …

Give our entitlement-hungry citizenry fewer handouts than promised (which they won’t do because it would mean getting voted out of office in favor of a different politician promising the world) …

Or fire up the printing presses. So, more handouts. More stimulus dollars. More benefits. More, more, more. All the while, the value of U.S. dollar will become less, less, less.

But Jeff, I’ve seen you write about how the dollar is strengthening and it’s bad for stocks. You’re being inconsistent.

Yes, the dollar is strengthening today and it’s bad for stocks. But take a longer-term perspective.

In 1913, $1 had the same purchasing power as $26 in 2020.

Even if we shorten our time horizon, the conclusion is horrific.

To buy $1 worth of goods back in 2010, it would require $1.41 of today’s dollars. That’s a cumulative inflation rate of 40.8% in just 13 years.

This “crumbling purchasing power” trend will not change as the government spends, spends, and spends some more.

Bottom line: The government is going broke. The question is how to prevent it from making you go broke.

A few action steps…

Be careful how long your money remains in cash – even at today’s higher nominal values.

You want to be sure you’re at least getting a positive real rate of return (meaning the nominal value minus the inflation rate is positive).

Buy hard assets – real estate, farmland, commodities. The prices of such assets have a better ability to float on top of rising inflation.

Make sure the companies you own through stocks have pricing power so they can preserve their margins. Even better if they pay healthy dividends through which you can line your pockets with inflation-boosted earnings.

Be careful around long-dated bonds or any fixed-income assets that would suffer in a rapidly rising rate environment.

One final note…

There’s no “guillotine chop” coming. Don’t look for it.

It will be the proverbial “frog in the pot” as the water comes to a boil. But you’ll see an escalation of financial instability, political instability, class warfare, and snowballing government reliance.

All of this will erode the dollar, so get your wealth mostly out of those dollars and into the assets we just discussed.

No, it won’t happen tomorrow. But unless wiser, fiscally conscious leaders begin making different choices, our nation is on a path toward a seismic economic fracture.

Don’t be collateral damage.

Have a good evening,

Jeff Remsburg

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